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Good morning, Vietnam: Sunny outlook buoys investors

Australian Prime Minister Scott Morrison has today touched-down in Hanoi, at a time when strained US-China trade relations could transform Vietnam from a holiday destination to an Asia-Pacific economic hub.

Vietnam has become a rare global bright spot, with the Southeast Asian nation enjoying rising foreign investment and rapid growth that places it amongst the fastest expanding economies in the region.

Foreign investors have backed the communist-ruled government’s market reforms, tipping in some US$854 million ($1.3 billion) to Vietnam’s US$193 billion stockmarket in the 12 months through 15 August.

The benchmark Ho Chi Minh Stock Index has posted nearly a 10 per cent gain for 2019, the highest among Southeast Asian markets and well ahead of the 0.8 per cent increase in the MSCI AC Asean Index.

Investors have been encouraged by government privatisations of state-owned enterprises, which have helped raise more than 5 trillion dong (A$317 million) in the first half of 2019, adding to last year’s record $7 billion from initial public offerings.

Foreign direct investment (FDI) surged to a record US$14.5 billion in 2018, almost double the previous year, with investors attracted by Vietnam’s competitive labour force and free trade deals, including a recent pact with the European Union.

ANZ Research’s Khoon Goh, head of Asia research, describes Vietnam’s gross domestic product (GDP) growth in the first half of 2019 as solid, “considering the downturn in global trade and the impact of African swine fever on the agriculture sector.”

Goh sees Vietnam achieving 6.7 per cent GDP growth for 2019, down from last year’s 7.1 per cent but within the government’s 6.6 to 6.8 percent target, making it “one of the fastest growing economies in Asia.”

Inflation has also cooled and is expected to average 2.8 per cent in 2019, below the State Bank of Vietnam’s 4 per cent target, with ANZ Research expecting no change in monetary policy this year.

Strengthening its fiscal position, Vietnam’s public debt to GDP ratio dropped to around 58 per cent at the end of 2018 and should fall further with a fiscal surplus equivalent to 3.2 per cent of GDP achieved in the first half of 2019.

The current account balance also remains “comfortably in surplus,” with its positive export growth contrasting with the negative performances of other regional economies.

“The country’s increasing reliance on generating growth from exports means it will not be totally immune to the global growth slowdown. However, the positive structural changes in the economy and ongoing reforms mean Vietnam is much better placed to weather external headwinds compared to other economies,” Goh said in a 29 July report.

Trump: 'Vietnam takes advantage of us'

Vietnam has benefitted from manufacturers moving production out of China in response to US-China trade tensions.

Electronics makers such as Japan’s Nintendo and South Korea’s Samsung are among those to have shifted production to Vietnam from China, with new export industries springing up including smartphones.

Yet a surge in US exports caught the attention of the Trump administration, with US President Donald Trump saying: “A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China.”

In July, the US Department of Commerce announced duties of more than 400 per cent on steel imports from Vietnam, alleging the goods originated in South Korea and Taiwan. More US sanctions could follow given the growing bilateral trade deficit, which has reached US$44 billion.

For Vietnam, its US exports reached 20 per cent of its GDP in 2018 and almost 26 per cent in the first half of 2019, making it exposed to any further US tariff hikes.

Yet analysts such as Aberdeen Standard Investments’ Bharat Joshi suggest domestic demand growth will outweigh any risks from trade tensions with the United States. Joshi nominates domestic stocks such as Vietnam Dairy Products, which he describes as an “anchor investment” in the nation.

“There is structural growth happening on the ground, you have rising middle-class income, demand for credit is starting to expand and the government is doing all it can to privatise,” Joshi told Bloomberg News.

Longer term, ANZ Research expects Vietnam to reach “upper-middle” income status by 2028, having been a “relative latecomer” in the region’s economic development. Strong FDI flows and a move towards higher value-added products has helped lift labour productivity, with growth rates seen averaging around 6 per cent for the next decade.

Gross National Income per capita reached US$2,400 in 2018 and is expected to double by 2028, moving it into the upper middle-income category, despite the headwind of an ageing population.

In its latest country report, the International Monetary Fund urged the authorities to address obstacles to the private sector, including structural issues in land and credit markets and the still large state-owned enterprise sector, together with tackling corruption and improving governance in the nation of 95 million.

However, Australian investors seeking exposure to Vietnam’s growth have limited options currently, with the US-listed VanEck Vectors Vietnam ETF (NYSE: VNM) one of a few to offer exposure compared to investing directly via a Vietnamese stockbroker.

Yet with Vietnam’s economy tipped for further expansion in line with market reforms, undoubtedly investors and financial product offerings will ultimately follow.